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11/15/2005
December Crude Oil contract keeps grinding lower. As of today, the contract closed below 57. It is quite obvious, that we are awash in oil. My opinion is that besides the Katrina and Rita hurricanes and the disruptions in the industry that they caused, we always were. I never bought the argument that there is a shortage of crude in the world market because of Chinese or Indian demand. What I do believe is that there is a huge risk premium built into the price of oil. Just imagine the risks in the oil market:
Venezuela and the possible political crisis as well as possible political isolation of that country Saudi Arabia - if the ruling family is overthrown we will be seeing at least $100 a barrel. What are the chances of this event happening? Certainly not zero... Iran - a mix of possible issues here. Nuke strike by Israel against Iranian Nuclear facilities or some kind of US military action against Iran will spike prices to extreme levels The other problem with Iran is Russia. These two countries grew a lot closer over the course of several last years. If an attack is launched against Iran, Russia will definitely respond in some fashion. The question is what will they do and how harsh their actions will be...
This is not a trade recommendation and no one should treat it as such.
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